"Why do airlines keep going bankrupt?"
 

Why Do Airlines Keep Going Bankrupt? : Planet Money : NPR




Why Do Airlines Keep Going Bankrupt?
01:00 pm

November 29, 2011

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by CAITLIN KENNEY



American Airlines is filing for bankruptcy protection. The airline is the last of the so-called legacy carriers, airlines that flew interstate routes before de-regulation of the industry, to reach this step. Delta, Northwest, United and US Airways all went through bankruptcy proceedings in the last 10 years.

While all airlines have faced skyrocketing fuel costs and lower demand in the last decade, the legacy carriers seem to be having the hardest time. So what's their problem? Two words — cost control. Legacy airlines costs are much higher — as much as 50 percent higher, according to economist Severin Borenstein. He is an economist at UC Berkley who has spent years studying the airline industry.

Borenstein says a big part of the reason costs for these airlines are so high is because of labor relations. It's not just about higher wages — it's because of what their contracts say workers are allowed to do.

"If you look at what low cost carriers do that is different, they get much higher productivity out of their workers," Borenstein says. "The jobs are defined more broadly. The workers tend to cover more of the work load."

AirlineForecasts analyst Vaughn Cordle says when you adjust labor costs for productivity, American Airlines is one of the worst performers.

Low cost airlines have been part of the market for decades now. Southwest began flying in 1971, but for years the legacy carriers didn't really see them as a threat.

Legacy airlines, like American, dominated through the 1990s largely due to effective marketing. Borenstein says programs like corporate discounts and frequent flyer programs, pioneered by former American CEO Robert Crandall, ensured customer loyalty. Also, the legacy carriers dominated the hub airports. They were able to get space in big city airports because they operated so many flights out of them.

"They could survive that for a couple of decades because they had the marketing and dominance at these hub airports to prevent low cost carriers from expanding very much, " says Borenstein. "Part of the problem is, airlines were growing aggressively trying to grow these networks and get market share and when we get the downturns, they found themselves with way too much capacity. So when they got into a situation in 2000 and 2001 where suddenly there was way too much capacity in the market, they found themselves with much higher cost operations than the low cost carriers."

After the Sept. 11 attacks, there was a huge drop in demand for flights, and Borenstein says demand has stayed pretty much flat ever since. Meanwhile, low cost carriers have been expanding — cutting more and more into the legacy carriers' customer base by offering lower and lower ticket prices. Borenstein says lower ticket prices combined with higher costs have pushed many legacy carriers into bankruptcy.

Bankruptcy is a messy and painful process, particularly for a company's employees. But for legacy airlines like American, it might just be exactly what they need. It will allow them restructure their business and to cut costs where they need to. They'll be able to renegotiate their debts and also rewrite employee contracts. The company has been trying to reach a new contract with its pilots since 2006.

"Bankruptcies are a way for capital to reorganize in a more efficient way. It does help to move the industry to a more efficient structure where consumers get good services at reasonable prices and airlines can actually make money, " Borenstein says. "Airlines are never going to consistently make money year after year because it is an industry that is inherently volatile. But I think that as they change they will be more effectively able to overall on average make money."

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The answer, of course: Bad Management.

And Pilots of Course. We make too much, can't sell $200 trans con RTs and make money. Of course the prices haven't changed much since the 60's, to the 80's, but of course inflation has.

Ticket then = Greater % of a person's income than today
Ticket today = Greater value for consumers today than 10, 20, 30 yrs ago.

Greater value today = Pilots must be paid less so JimBob (who makes more than the F.O. as a Walmart greeter) can take his family on a Disneyland vacation every other year.

Some interesting numbers. Look at pilotwage/salary%of operating exp and ASM per pilot.

http://www.airlinefinancials.com/upl...ne_summary.pdf

I was thinking high operating costs may have been because of interest on $26 Billion in debt, no doubt in the last few years AMR must have been paying loanshark rates. I wonder how many pilots were involved in securing those credit facilities?

Labor is a popular scapegoat, and seems to be a common theme in any article that UAL Scab Cordle is mentioned in.

By the way, the article ignored Hawaiian Airlines who is a legacy carrier AND filed for Chapter 11 bankruptcy protection on March 21, 2003.

We lose a little on each unit, but make it up in volume!

UC Berkley? Is that near Harvrd or closer to Notr Dme?

With Alaska Airlines having taken over where Aloha left off, and then some,and Allegiant looking at Hawaii with 757s, I think Hawaian Airlines Asia and Australia expansion could not have come at a better time.:cool:

Some how SWA continues to soldier on, paying solid wages, keeping employees happy and productive, producing a product people like, and making money.

A chart in the WSJ today showed SWA as having the highest CASM after AMR.

Nice!

:eek::rolleyes::D

Here are some comparisons based on the quarterly and annual reports, what data was WSJ using?

Airline Financial Data

Does anyone know how much training costs contribute to the overall cost of a pilot? I've heard different numbers, but I heard that one senior captain at Delta retiring results in something like 7 or 11 (numerous at any rate) training events. One senior captain leaves at a single fleet carrier a la Southwest or Alaska and it results in 2 training events.

OTOH, I've wondered if all of those training events is nullified by the fact that managements can or should put the right size gauge aircraft on each route. Plus, I've wondered if the training costs are also nullified by the fact that training cost are spread over more seats at the legacies since their average aircraft size is so much larger than their low cost competitors.

On the other hand, AirTran, Jetblue, SWA, Spirit, etc. really don't have that many types on property.

A Southwest pilot has new hire training, and upgrade training. Plus the type ride before he's hired, so I guess that's three. But only two career training events on the company dime.

Every airline pilot has recurrent so I figure that's a wash.

Because they are not allowed to fail.

According to BTS data for 2Q2011 US Airways is highest @17.8 cents per ASM. Next come United & Delta. American comes in at 15.9. Southwest is down the list at 12.6. Spirit is lowest at 9.9. This is for all the legacy and lcc's.

More reason for home school beyond grade 12
 

Severin Borenstein Economist: Berkeley: This guy is an an ignorant clown and has no clue about the airline industry. I can't wait to hear what Michael Boyd will say about him in his "Hot Flash" next Monday. Labor is not the problem. The pilots and other employees @ Low Cost Airline Southwest make much more $$ than those at American. This a revenue problem and a management problem.

"AirlineForecasts analyst Vaughn Cordle says when you adjust labor costs for productivity, American Airlines is one of the worst performers."

VC is a United scab. None of his opinions are valid.

Dunno, I didn't write the article.

But with the now plethora of charts and graphs have shown up, I guess it proves that you can prove anything with statistics.

Most of the chapter 11 filings in the 2003 to 2006 time frame can be tied directly to the fuel hedges held by SW. They decided to use those hedges to try and drive 1 or 2 major airlines out of business. In fact that is almost a direct quote from their VP of flight ops at a line check meeting. They would have succeeded completely in their plan except for the collapse in the price of oil in 05. That is all that saved UAL, USAIR and perhaps Delta. Had SW not been hedged for years at under 40 a barrel the industry would look quite different today and average wages might be much higher.
Airline tickets are a commodity, anytime you control 20 percent of a commodity you control pricing. That goes back to Crandel's famous quote that the airline industry is the one business where you are held hostage by your stupidest competitor.

Sailing,

You went way far out on a limb with your claim that SWA's hedges caused Delta's bankruptcy.

First of all, lets call these legal maneuvers what they are ... strategic default. American has 4 billion in cash (nearly the liquidity of Delta at the end of the third quarter). American likely will not need DIP financing, they have the cash to get through this. Unlike our neighbors, these corporations can screw the bank and keep their house (and bonuses).

There is an awful lot of evidence to show Delta's bankruptcy was in the planning stages as far back as pre-9/11. Look at Leo Mullin's resume for starters. He was a banker. Hollis Harris was an airline guy and was passed over. Mr. Harris went on to make other carriers relatively successful and they had a lot less going into his tenure than Delta had going for it. McKinsey was publishing that they were helping United as far back as 2000 with the planning it had developed at Delta Air Lines. As history shows, United filed in 2002 and Delta's roadmap, as well as Northwest's was nearly as similar as two different crews reading the same checklist.

At 28 to 37 million each, Delta's RJ fleet required the commitment of more than 22 Billion. Add to that the cost of the corporate acquisitions and repairs (4 to 5 Billion) and Delta was into the RJ experiment for about American's total debt load ... and you're stating that had nothing to do with the "bankruptcy."

SWA in many ways is not a direct competitor for Delta. Sure they used their hedges in a competitive manner, but Delta would have gone bankrupt without SWA's influence. Heck, I think they might go there again as a competitive response if American's trip to the Courthouse makes them too tough a competitor.

... or you can believe as Jamie Baker says, that Delta's stock is going to $17.50. His Company has some bonds they would like to sell you.

Major airlines have mostly gone "bankrupt" because they don't keep their promises to bond holders, share holders, or employees. They go "bankrupt" because the Courts let them.

Wouldn't it be more appropriate to blame the bungled mismanagement at other airlines for the crushing pressure to keep labor costs down (both inside and outside of bankruptcy)?

I'd say if the others had more astute management and foresight they'd have hedged as well, would have been in a better overall financial position, and then "average wages might be much higher."

Sailing you are right on many of your points. It wasn't until 2007 when SWA started raising fares that the industry rebounded. As to why every legacy carrier has hit bk one must conclude that the aviation system itself is a failure. Our industry faces more taxes, fees and burdens that surpass any other industry in our country and we operate in outdated inefficient ATC system that has yet updated. With Congress threatening to prohibit airlines from charging bag fees (SWA lobby for you) and no realistic energy policy in place that allows speculators to make millions on virtual oil while our costs go through the roof.

Bar, You have your timelines and people screwed up. Hollis Harris was passed over as CEO of Delta in 1989. Ron Allen was picked instead of Hollis. He went on to start the turnaround at CAL shortly after followed by becoming CEO of Air Canada. He was long gone from Delta in 97 when Mullins was hired.
Delta did everything it could to stay out of Chapter 11. The experts if you want to quote them said Delta waited way to long to file. In fact the airline almost had to go chapter 7 because they let their cash position dwindle down to the point where there was a real chance of not being able to make payroll or purchase fuel. The last thing the management team wanted was to file. They all held incredible numbers of stock options that were rendered worthless and in the end most were fired. Why would the board fire them if they were doing what they hired them to do. Leo was hired in the 97 when Delta was enjoying record profits and the future looked bright. To say he was hired in 97 expressly to lead Delta into Chapter 11 8 years later is a big stretch.
As far as SW airlines when they were hedged they were able to set and control domestic pricing in the US. They were losing money on a operational basis almost every quarter and making it back in the hedges. They could have raised fares and made a lot more money but they went all in so to speak to try and drive UAL out of business. It only failed when fuel prices collapsed. The current profits in the airline industry are because SW is no longer hedged and has had to raise prices like the rest of us to stay in the black. Any airline with more then a 15 percent market share in the domestic market can set and control the yield of all the other airlines for the domestic US. That is simply how a commodity works.
SW with the collapse of the wage structure at the legacy airlines no longer enjoys the cost advantage it once had. It can't take market share at will from other airlines. They have had to make a radical change in their business plan from internal growth only to a merger strategy to continue to expand. The hedges that were once so important to them in the end ran their cost structure way up as they were unable to demand any wage cuts from employees while still making a profit.
SWAPA is very aware of all this and that is one the reasons they have not pushed management for any substantial wage increases after the 01 time frame when they piggybacked of DAL and UAL to bump their rate to 192 and hour. 10 years later its at 212 an hour or a less then 1 percent a year increase. SWAPA does not want to be where they are in wages. They want the historical cost advantage back so they can resume their 10 percent year over year growth that produced 7 year Captains for 2 decades. Sadly with the latest from American they are not likely to see it for a long time.

SW had no choice in 07. They had to raise fares or lose money. They actually taken big losses in hedges and had to cover the loss. I think that was the year that after killing every fare increase the majors tried to float for 4 years they led the industry in increases. Instead of killing them they were leading the charge for higher fares. The entire industry did well as a result.